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What is market sentiment?

Market sentiment refers to the overall attitude of investors toward a particular forex market. It is the feeling or tone of a market, or its crowd psychology, as revealed through the activity and price movement in that market. In broad terms, rising prices indicate bullish market sentiment, while falling prices indicate bearish market sentiment.

Market sentiment, also called "investor sentiment," is not always based on fundamentals. Day traders and technical analysts rely on market sentiment, as it influences the technical indicators they utilize to measure and profit from short-term price movements often caused by investor attitudes.

Market sentiment is also important to contrarian investors who like to trade in the opposite direction of the prevailing consensus. For example, if everyone is buying, a contrarian would sell.

Indicators to measure market sentiment

Market sentiment indicators are one of the most helpful tools at the disposal of investors looking to judge how the market feels now and where sentiment is headed, helping to find undervalued or overvalued opportunities. However, these indicators should be used alongside other technical and fundamental analysis to provide added depth to research, rather than used as a single authority on the outlook for forex markets.

VIX

volatility index (VIX), also known as the fear index, is driven by prices. A rising VIX means an increased need for insurance in the market. If traders feel the need to protect against risk, it's a sign of increasing volatility. Traders add moving averages to the VIX that help determine if it's relatively high or low.

The high-low index

The high-low index compares the number of currency pairs making 52-week highs to the number of currency pairs making 52-week lows. When the index is below 30, currency prices are trading near their lows, and investors have a bearish market sentiment. When the index is above 70, currency prices are trading toward their highs, and investors have a bullish market sentiment.

BPI

The bullish percent index (BPI) measures the number of currencies with bullish patterns based on point and figure charts. Neutral markets have a bullish percentage